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AMHS Tariff Analysis

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AMHS Tariff Analysis Team Member Company Project Role Patrick Burden Northern Economics, Inc. Project Director Michael Fisher Northern Economics, Inc. Project Manager Michelle Humphrey Northern Economics, Inc. Lead Analyst and Author Terri McCoy Northern Economics, Inc. Editor Gary Katsion Kittelson & Associates, Inc. Oversight, KAI David Reinke Kittelson & Associates, Inc. Lead Analyst, KAI Robert Doll Transys Associates Technical Reviewer Please cite as: Northern Economics, Inc. Alaska Marine Highway System Tariff Analysis. Prepared for Alaska Department of Transportation & Public Facilities. January 2015. Northern Economics, Inc. completed a rate study for the Alaska Department of Transportation and Public Facilities, Alaska Marine Highway System (AMHS) in 2008. The study looked at the rates of alternative modes of transportation within the study area and rates for similar ferry systems in comparison to AMHS tariffs. Since that rate study was conducted, there have been no changes made to AMHS’s tariff structure, except for tariffs created for new routes. This tariff analysis looks at the changes made over the last six years by AMHS’s direct competitors and similar ferry systems around the world. The study also reviews the changes that the market has experienced since AMHS last adjusted tariffs. This analysis also looks at the rate anomalies on comparable routes within AMHS’s systems. Some of the key takeaways highlighted throughout the report are: AMHS has kept tariffs static since its last increase of 3.2 percent in 2007. Since 2007 the United States (U.S.) has experienced an annual average inflation rate of 2.08 percent. The Consumer Price Index in Alaska has increased by 12 percent and the Producer Price Index for marine transport services in the U.S. has increased by 19 percent since 2007. Since 2008, AMHS’s average operating expenditures per nautical mile have increased by 33 percent. Passenger tariffs of comparable ferry systems have increased by an average of 21 percent since 2008. Passenger vehicle tariffs of comparable ferry systems have increased by an average of 7 to 10 percent since 2008. Cabin tariffs of comparable ferry systems have been much more variable, with a wide range of changes that average 60 percent for inside berths to 41 percent for outside berths, since 2008. Alternative freight and cargo rates have increased over the past six years by as much as 236 percent per nautical mile. Many comparable systems used in this analysis charge different tariffs for commercial and public customers, and the tariffs for commercial customers are almost always higher. This study also looks at the development and implementation of a change in tariff policy with the goal of creating a fair and equitable tariff structure. After reviewing transportation industry standards and a conducting a comparative analysis, the study team recommends AMHS do the following: Bring in outlying tariffs so that the average tariff per nautical mile is within 25 percent of the average tariff per nautical mile for the route distance and region Adopt a formulaic approach to setting tariffs Adopt a two-tiered tariff structure that accommodates the difference in demand during the summer and winter seasons, with higher tariffs in the summer season. The study team recommends passenger seasonal adjustments between 0–30 percent and seasonal vehicle adjustments between 30–40 percent. These recommended ranges are based on an analysis of the Washington State Ferries and BC Ferries, who have implemented seasonally adjusted tariffs. Setting the lower bounds of the recommended seasonal adjustment at zero instead of three or five percent gives AMHS more freedom to assess what routes are most impacted by seasonal traffic, for both passenger and vehicles, and adjust accordingly. This also presents the option for some tariffs to remain constant year- round if AMHS does not deem a seasonal adjustment appropriate. Set a target farebox recovery rate and review and update tariffs annually to adjust for changes in capital and operating cost. Based on industry averages, the study team recommends a target farebox recovery rate between 39–65 percent. Differentiate between commercial and passenger vehicle tariffs. The study team recommends that commercial vehicle tariffs be 60–120 percent higher than passenger vehicle tariffs. Adopt a premium tariff for dedicated and express route types. The study team recommends starting with a 10 percent premium for express, dedicated, and highly utilized routes. The ad hoc approach to tariffs that AMHS has employed in the past has resulted in a structure with substantial variations in tariffs between routes. Our proposal for bringing the outlying tariffs in line with the average tariff per nautical mile and for the adoption of formulas for establishing passenger and other tariffs is intended to allow incremental increases in all tariffs, which can be more evenly distributed over AMHS routes. The recommended tariff structure will also be more equitable, transparent, and easier for customers to understand. The analysis uses current rates for comparable ferry systems and routes to assess how passenger tariffs have changed since the 2008 study. The 11 ferry systems used in each analysis are: BC Ferries Moby Lines Brittany Ferries P&O Ferries DFDS Seaways Stena Line Hurtigruten TT-Line Irish Ferries Viking Line Marine Atlantic Sample tariffs were collected during both peak (high) and off-peak (low) seasons to illustrate the average range in tariff prices in the following five distance categories: 0 to 50 nautical miles 51 to 100 nautical miles 101 to 300 nautical miles 301 to 500 nautical miles 501-plus nautical miles In each of the five distance categories displayed in Figure ES-1, AMHS’s average passenger tariff per nautical mile is less than the low (off-peak) average of the comparable systems in 2014. In 2008, AMHS’s average passenger tariff per nautical mile was lower than the low average passenger tariff per nautical mile in each distance category with the exception of the 1 to 50 mile category, but with the increasing trend in average passenger tariff prices over the past 6 years, AMHS has dropped below the average of the comparable systems in this category as well. The 10 ferry systems used in this comparative analysis (DFDS excluded) had an average tariff per nautical mile increase of 21 percent across all of the distance categories considered over the past 6 years, whereas AMHS tariffs have remained static. 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1 to 50 Miles 51 to 100 Miles 101 to 300 Miles 301 to 500 Miles 501 Plus Miles 2008 High 2008 Low 2014 High 2014 Low AMHS Source: Developed by Northern Economics, Inc. based on data from multiple ferry lines Figure ES-1 also illustrates the relationship between the tariff per nautical mile and the distance of the route. As routes increase from 1 to 100 miles, there is a downward trend in the average tariff per nautical mile, but as routes increase from 101 to 501-plus miles, there is an upward trend. This u-shaped trend accurately reflects the costs associated with operating routes of various distances. Up to a certain point, around 101 to 300 miles, the cost associated with operating a route increases at a lesser rate than the route distance increases, causing the average tariff per nautical mile to decrease. For routes over 300 miles, the cost to operate these longer routes starts to increase at a greater rate than the increasing distance, thus causing the average cost per nautical mile to increase. When compared to the average inside cabin tariff per nautical mile of 11 comparable ferry systems in both 2008 and 2014, AMHS’s tariff is lower than both the high and low averages in two of the three distance categories assessed and falls in between the high and low averages in the remaining category (101 to 300 miles). Figure ES-2 displays the average inside cabin tariff per nautical mile of the nine comparable systems (Hurtigruten and P&O Ferries excluded) as well as the unchanged AMHS average inside cabin tariff per nautical mile. $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 51 to 100 Miles 101 to 300 Miles 301 to 500 Miles 2008 Inside-High 2008 Inside-Low 2014 Inside-High 2014 Inside-Low AMHS- Inside Source: Developed by Northern Economics, Inc. based on data from multiple ferry lines. The outside cabin tariffs charged by similar systems have seen an increasing trend for routes with distances less than 50 nautical miles, and a decreasing trend on routes longer than 51 nautical miles. Figure ES-3 displays the high and low average outside cabin tariff per nautical mile in 2008 and 2014 for nine comparable ferry systems (Hurtigruten and P&O Ferries excluded), as well as the average outside cabin tariff per nautical mile charged by AMHS. The average outside cabin tariff per nautical mile charged by AMHS is still lower than the average tariff for comparable ferry systems in each distance category, even though the average outside cabin tariffs of comparable ferry systems have seen decreases. Another notable difference between AMHS and many of the ferry systems used in this analysis is the requirement for passengers to purchase a cabin on longer routes. Currently AMHS does not require the purchase of a cabin on any of its routes and provides a passenger-only tariff option on each route. $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 51 to 100 Miles 101 to 300 Miles 301 to 500 Miles 2008 Outside-High 2008 Outside-Low 2014 Outside-High 2014 Outside- Low AMHS-Outside Source: Developed by Northern Economics, Inc.
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